February 2007
Authors:
Philip H. Hecht
+1.202.778.9380
philip.hecht@klgates.com
David T. Case
+1.202.778.9084
david.case@klgates.com
Erika Kane
+1.202.778.9255
erika.kane@klgates.com
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Punitive damages claims raise the stakes in litigation because punitive damages awards can be grossly disproportionate to actual damages suffered by an aggrieved party. For this reason, the presence of a punitive damages claim can affect every practical and strategic aspect of a case, including evaluation of litigation risk, settlement valuations, the development and presentation of evidence, jury instructions, and argument. It therefore is not surprising that punitive damages issues have been scrutinized by the United States
Supreme Court over the past decade under the basic principles of fundamental fairness embodied in the Due Process Clause of the Constitution.
On February 20, 2007, the Supreme Court held in Philip Morris USA v. Williams that a punitive damages award that punishes a defendant for injuries caused to nonparties violates due process.
1 The 5-4 decision is the fi rst time that the Roberts Court has addressed punitive damages issues, and it is consistent with two Rehnquist Court decisions curtailing punitive damages awards. Philip Morris is another point on the Court’s evolving punitive damages jurisprudence curve, and it is unlikely to be the Court’s fi nal word on the subject.
Nevertheless, litigants will need to factor the lessons of Philip Morris into their evaluation of litigation risks and strategy.
Philip Morris is the most recent example of the Supreme Court’s willingness to review and reverse signifi cant punitive damages awards, and must be viewed in the context of the Court’s decision in BMW of North America, Inc. v. Gore 2 and its decision in State
Farm Mutual Automobile Insurance Company v. Campbell.
3 In BMW, the Court reversed a punitive damages award as grossly excessive and set forth three guidelines for determining whether a punitive damages award was unconstitutional: (1) the degree of reprehensibility of the defendant’s conduct; (2) whether punitive damages are “reasonably related” to the actual or potential harm suffered (typically measured by the ratio of punitive damages to compensatory damages awarded); and (3) the difference between the punitive damages awarded and the penalties available by law for comparable conduct.
4 The Court refi ned these guidelines in State Farm, where it held that a punitive damages award was excessive and that “a defendant’s dissimilar acts, independent from the acts upon which liability was premised, may not serve as a basis for punitive damages.” 5 By way of further guidance, the
Court stated that a punitive damages award that is less than ten times the amount of actual damages is “more likely to comport with due process,” and that, historically, the outside limit for such awards is typically three to four times compensatory damages.
6
1 No. 05-1256 (Feb. 20, 2007).
2 517 U.S. 559 (1996).
3 538 U.S. 408 (2003).
4 517 U.S. at 575.
5 538 U.S. at 422.
6 Id . at 425.

In Philip Morris , smoker Jesse Williams’ estate brought negligence and deceit claims in Oregon state court against the tobacco company, arguing that it knowingly and falsely led Williams to believe smoking was safe. At trial, Williams’ attorney told the jury to
“think about how many other Jesse Williams in the last 40 years in the State of Oregon there have been
. . . .” Philip Morris requested, but did not receive, an instruction to the jury that “you are not to punish the defendant for the impact of its alleged misconduct on other persons . . . .” Upon deliberation, the jury awarded Williams’ widow $821,000 in compensatory damages and $79.5 million in punitive damages. After various appeals, the Oregon Supreme Court upheld the award.
At the Supreme Court, the company argued that
Oregon unconstitutionally had permitted Philip
Morris to be punished for harming nonparties. The company also argued that the disparity between the punitive and compensatory damages awards—a
100-to-1 ratio—violated the principle in BMW and
State Farm that punitive damages bear a “reasonable relationship” to the actual damages suffered by the plaintiff. The Court agreed with the company on its fi rst point of error, holding that it is a violation of due process to use punitive damages to punish a defendant for the injuries of nonparties, but the Court did not reach the question of whether the $79.5 million award was excessive, and remanded the case to the Oregon
Supreme Court.
The Supreme Court gave three reasons for holding that injuries to nonparties cannot be used to punish a defendant. First, it stated that a defendant punished for injury to nonparties has no opportunity to defend against the charge as to those individuals.
7 Second, it reasoned that it is likely a jury could only speculate about the number of nonparty victims and the severity of their injuries, and that such speculation magnifi es the risk of arbitrariness, uncertainty, and lack of notice to the defendant—risks that are key due process concerns that the Court’s punitive damages jurisprudence seeks to address.
8 Third, it found no authority to support the use of punitive damages to punish defendants for conduct against nonparties.
9
Signifi cantly, Philip Morris does not bar proof of injuries to nonparties from coming into evidence.
Indeed, the Supreme Court held that harm to nonparties may be considered by the jury in determining whether the defendant’s conduct was “reprehensible,” but the jury cannot punish the defendant on account of that harm:
Evidence of actual harm to nonparties can help to show that the conduct that harmed the plaintiff also posed a substantial risk of harm to the general public, and so was particularly reprehensible—although counsel may argue in a particular case that conduct resulting in no harm to others nonetheless posed a grave risk to the public, or the converse. Yet for the reasons given above, a jury may not go further than this and use a punitive damages verdict to punish a defendant directly on account of harms it is alleged to have visited on nonparties.
10
Although Philip Morris clarifi es and restricts the role of evidence of harm to nonparties in punitive damages awards, it leaves unanswered two important questions.
The fi rst question is what procedures courts should adopt to avoid jury confusion between considering harm to nonparties for purposes of determining
“reprehensibility” and considering that harm in calculating punitive damages awards. The Supreme
Court limited its guidance on this question to observing that “state courts cannot authorize procedures that create an unreasonable and unnecessary risk of any such confusion occurring,” and that “States have some fl exibility to determine the kind of procedures they will implement” to protect against that risk.
11
The second question is whether the $79.5 million award in the context of the facts presented in the case is unconstitutionally excessive. It certainly is possible that the Court will address either or both of these questions in future cases.
7 Philip Morris , slip op. at 6.
8 Id.
9 Id.
10 Id. at 7.
11 Id. at 9.
February 2007 | 2

By requiring juries to focus only on injuries to the plaintiff(s) before the court when calculating the amount of punitive damages, Philip Morris arguably will limit the amount of punitive damages awards to individual plaintiffs or groups of plaintiffs, 12 and thus affect how defendants assess risk in a case with punitive damages, including the evaluation of previous punitive damages awards in the same area of the law. Philip
Morris also will have an impact on procedural issues, including how a party frames discovery, summary judgment, and motions in limine. For example, the
Supreme Court’s direction to courts to ensure that their procedures mitigate the risk of jury confusion is likely to result in signifi cant disagreements over jury instructions. Indeed, because the Court did not establish specifi c guidelines for courts to follow when instructing jurors on the proper calculation of punitive damages, parties in mass tort litigation may be able to leverage this uncertainty to their benefi t during trial or during settlement negotiations. Moreover, in any case in which the specter of nonparty injuries may have infl uenced the award of punitive damages or the size of the award, e.g.
, cases involving asbestos, pharmaceuticals, other mass-marketed products or environmental contamination, defense counsel may wish to rely upon Philip Morris in seeking a reduction or vacation of the punitive damages award by either the trial judge or the appellate court.
Philip Morris refi nes the contours of the Court’s punitive damages jurisprudence and leaves the door open for the Court to review other punitive damages awards in the future. In the meantime, parties can use Philip Morris to shape settlement and litigation strategy and tactics.
12 For example, when the defendant’s misconduct has the potential to cause great harm to individuals on a widespread basis, but the actual plaintiffs before the court have suffered only minimal or potential harm, the new procedures required by Philip
Morris could, at least in theory, result in a much smaller punitive damages award than was possible prior to the decision.
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